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Goldman Sachs has taken out its crystal ball to make its economic forecasts for next year, ranging from the recovery of the US housing market to stagnant growth in the European Union. Financial News takes a look at the macro themes Goldman’s analysts think will dominate markets in 2013.

The pace of Chinese growth will stabilise at a touch above 8%, say Goldman analysts

1.Global growth: A ‘hump’ to get over, then a clear road ahead

The analysts predict weak growth in early 2013 but, if that period is successfully navigated, we could see a sustained recovery once the world economy gets over the risks to growth in the first part of the year from fiscal restraint. Goldman predicts global growth for 2013 of 3.3%, broadly in line with 2012. US gross domestic product growth is seen stuttering at around 2%, there will be a near-recession in the euro area and Chinese growth is seen falling below the average of the last five to 10 years.

But the analysts say that below the surface, there are significant differences from 2012. “Further healing in the US housing and labour markets; a progressive relaxation of the global energy supply constraint; and ‘room to grow’ particularly in the developed world,” they said. If the 'hump' can be navigated, Goldman envisages a "sustained sequential recovery in growth, which builds into 2014 and beyond."

Housing stabilisation and private-sector healing in the US

The US housing sector has picked up this year and is set to continue – the analysts predicted that we will see a 20% growth in housing starts and a 2-3% growth in home prices in 2013. They said: “[We will see] further modest US home price gains and continued increase in housing activity.”

Stable China growth, but not like the old days

The pace of Chinese growth will stabilise at a touch above 8%, the analysts predicted. Their risk analysis of China suggested that key assets, such as Chinese equities, had reflected large downgrades to China’s growth view. They said: “While there has been a meaningful rebound in the market’s pricing of China risk in the last three months, there may still be scope for stability alone to provide relief.”

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The divergence in growth between countries in the euro core area, such as Germany, and the periphery, such as Spain, will only get worse….

5….while the euro area will become less important as a driver of global risk

Despite ongoing growth weakness in the euro area, the analysts predicted that European issues will be less likely to drive the global risk picture. They said: “This is partly because policy measures and institutional innovations reduce the deep systemic risks that have been the most likely source of global transmission; but it is also because we expect a continued ‘muddling through’ by euro area policymakers that mitigates spikes in local risk.”
They reminded investors to be prepared to navigate well-flagged downside risks such as Spanish economic pressure that could escalate into political risks unless the European Central Bank intervenes, or Italian political uncertainty could lead to fresh concerns about a slowdown in the pace of the country’s reforms.

More growth in emerging markets

Growth will accelerate significantly in emerging markets between 2012 and 2013, but growth rates in large emerging markets such as China and South Korea may slow down modestly over the long term.

Analysts predicted a moderate growth slowdown in China from the fourth quarter of 2012 and the first quarter of 2013, and limited acceleration for the rest of 2013 and 2014.

But problems will remain with emerging markets

Emerging markets will come up with different responses to inflationary pressures and current account imbalances will remain a concern, for countries such as Turkey, India and Ukraine. Some countries will deliberately aim for a weaker currency, such as the Czech Republic while others like Russia are in tightening mode already.

They said: “The ‘orthodoxy’ of the central bank reaction function to inflation is also likely to vary, and so the risk in some places is that even with building inflationary pressure, policy does not necessarily tighten or tighten in ways that are not easily reflects in market pricing.”

G4 unconventional easing will continue

Low interest rates will persist next year. The ECB may even start buying up private assets to bolster euro corporate and bank credit to thaw the continued freeze in private-sector credit availability in periphery countries, such as Spain.

Search for yield continues, but risk-reward deteriorates

Investors will keep searching for yield and will keep looking to corporate credit, but the risk-reward will be less lucrative. Goldman said: “Corporate credits – which have good fundamentals and a better liquidity profile – should continue to see a slow and modest tightening in spreads.” This might even lure corporates into re-leveraging while they can.

Constraint on commodities will loosen

Goldman's analysts believe supply constraints are starting to ease, thanks to increased US shale production and the easing of oil pipeline constraints. Oil markets will stabilise and could settle at between $80-90 a barrel next year, Goldman predicts.